Future Retail – Will the 'Tathastu' strategy translate to better earnings visibility?

Future Retail - An Overview

What could work in Future Retail’s favour?

Tathastu implementation

Future Retail intends to increase the ‘Easyday’ (small-size convenience stores) store count from 537 (as on September 30, 2017) to 1,100/10,000 by the end of FY18/22, respectively. Consequently, the contribution of Easyday outlet sales to the company’s revenue is expected to increase from 9 percent currently to 23 percent by FY20.

The goal is to open an Easyday outlet (with a maximum number of 2,000/3,500 members/SKUs per outlet, respectively) in every two kilometres of the company’s core markets across India.

Besides ensuring timely availability of the company’s products (food, home accessories, FMCG, garments) to the masses through discounts/schemes/privileges, the plan aims at blending the benefits of online and offline retailing, too

Simultaneously, emphasis will be laid on deriving synergistic advantages by virtue of logistical cost savings (through cluster-based expansion in densely populated Indian cities/towns) and tackling competition from e-commerce portals, which, in turn, may result in a margin uptick.

Convenience stores have immense potential to generate operating leverage owing to a high asset turnover rate. This can be attributed to emergence of low cost model (for sourcing, storage, and supply efficiencies), increase in frequency of food purchases, and unwillingness on the consumers’ part to travel long distances to buy basic necessities.

Business integration through Hypercity takeover

The deal will give Future Retail access to nearly 20 million incremental footfalls and stores with premium positioning. Should Future Retail succeed in making Hypercity’s loss-making operations profitable (from FY19, in all likelihood), the combined synergy will not only reduce its overheads and promotion spends (since Hypercity properties will be functional almost immediately with minimal or no capex required at the outset), but also facilitate economies of scale (because of similarities in business between the two).

Robust store visibility pan-India

Future Retail’s outlets are geographically diversified across the country.

Apart from leveraging its existing network, Future Retail will endavour to expand its footprint through new stores and closure of non-profitable/underperforming ones. Going forward, Big Bazaar outlets will have a major influence on the company’s success, as has been the case even in the past.

Additionally, the company is anticipated to target a higher percentage of overall revenue from branded garments (more specifically from private label ones) as against the comparatively low-margin grocery products.

Industry tailwinds

Lower logistics expenses, retail industry consolidation, and market share transition from unorganised entities (currently constituting 85-90 percent of Indian retail) to organised ones are some of the key positives that Future Retail hopes to capitalize on.

Further, value fashion clothing (constituting about 60-70 percent of Future Retail’s annual apparel sales, and mainly sold through the company’s ‘Fashion Big Bazaar’ stores), benefits from the rejig in GST. Garments with a price tag of less than Rs 1,000 per unit will attract only 5 percent GST, as opposed to a 12 percent rate for those priced in excess of Rs 1,000.

Peer comparison

Outlook

It is pertinent to note that in the neighbourhood stores domain (the focal area of Future Retail in the long-run), there is hardly any player that has been able to function profitably in India. This is because of stiff competition from smaller mom and pop (kirana) stores, high working capital requirements, and higher proportion of sales from grocery items (that aren’t as margin-accretive as general merchandise and apparel). It’ll be interesting to see how Future Retail does things differently in this space.

A gradual reduction in the capital locked in less profitable segments (home furniture, electronics) will enable the company to focus its attention solely on retail of clothing and grocery through its three brand outlets - Fashion Big Bazaar, Big Bazaar, Easyday.

Though Biyani’s Tathastu exists only on paper at the moment, it would be unwise to write him off given the slew of measures that he has undertaken to turnaround the financial performance of Future Group in earlier years.

To achieve a top-line of USD 1 trillion, Future Retail needs to grow at a CAGR of nearly 20 percent for the next 30 years. Inorganic growth opportunities may perhaps pave the way towards achieving the vision, which makes the Future Group an exciting prospect worth keeping an eye on.

At 30x FY19 projected earnings, Future Retail trades at a steep discount to its peers. Prima facie, though the historical margins of the company vis-à-vis the rest aren’t quite up to the mark, the possibility of a further re-rating cannot be ruled out since a change in the business mix can strengthen the fundamentals. Investors with a long-term investment horizon may consider keeping this stock on their radar.

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